Texas General Lines — Life, Accident, Health and HMOLife InsuranceEasy
A 45-year-old client purchases a $500,000 Whole Life insurance policy. After 10 years, the policy has accumulated a significant cash value. The client decides they no longer need the full death benefit but wishes to continue coverage at a reduced amount without paying further premiums. Which nonforfeiture option should they choose?
- ACash Surrender Value
- BReduced Paid-Up Option
- CAutomatic Premium Loan
- DExtended Term Option
Show answer & explanationAnswer & explanation
Correct answer: B. Reduced Paid-Up Option
The Reduced Paid-Up option uses the policy's cash value as a single premium to purchase a fully paid-up policy of the same type (Whole Life) but for a reduced death benefit. This meets the client's desire for continued coverage without further premium payments.
Why the other options are wrong
- A. Cash Surrender Value terminates the policy and pays out the cash value, ending coverage.
- C. Automatic Premium Loan is a policy rider that uses cash value to pay overdue premiums, not a nonforfeiture option for reducing coverage.
- D. Extended Term Option uses cash value to purchase a term policy for the original face amount for a limited time, not a reduced permanent policy.
Reduced Paid-Up Option
A nonforfeiture option where the policy's cash value is used as a single premium to purchase a fully paid-up policy of the same type for a reduced face amount.
- Policy remains in force for life.
- No further premium payments required.
- Death benefit is reduced from the original face amount.
Memory trick: Cash Extended, Reduced Paid-Up